Key information

Trident General Insurance Co Ltd v McNiece Bros Pty Ltd

(1988) 165 CLR 107

Quick summary

Facts

Blue Circle Cement entered into a contract of insurance with Trident. The insurance policy covered liability for accidents occurring during this construction and defined the ‘assured’ parties as including all Blue Circle’s contractors and sub-contractors (which included McNiece). McNiece subsequently became the principal contractor for work being carried out at the Blue Circle plant. A worker was seriously injured and recovered a judgment against McNiece who sought indemnity under the policy from Trident. Trident denied liability on the ground that McNiece was not a party to the insurance contract.

McNiece succeeded at first instance in the SC of NSW. On appeal to the Court of Appeal the court found there was no privity of contract and McNiece had not provided consideration to Trident. Nevertheless they found for McNiece on the ground that under insurance policies beneficiaries can sue on the policy despite no privity or consideration. Trident appealed to the High Court.

Held

At least in relation to insurance policies, and almost certainly in relation to contract of indemnity generally, where the evidence is that third parties were in the contemplation of the principal, then those third parties can enforce the contract. That was the case here - Trident was liable.

Note: The High Court made it clear that it would recognise an extension of the boundaries of privity.

Some more detail

Facts

This case regarded a work site. Blue Circle Cement entered into a contract of insurance with Trident. The insurance policy covered liability for accidents occurring during this construction and defined the ‘assured’ parties as including all Blue Circle’s contractors and sub-contractors (which included McNiece). McNiece subsequently became the principal contractor for work being carried out at the Blue Circle plant. A worker was seriously injured and recovered a judgment against McNiece who sought indemnity under the policy from Trident. Trident denied liability on the ground that McNiece was not a party to the insurance contract.

History of proceedings

Trial

McNiece succeeded at first instance in the SC of NSW.

First appeal

On appeal to the Court of Appeal the court found there was no privity of contract and McNiece had not provided consideration to Trident. Nevertheless they found for McNiece on the ground that under insurance policies beneficiaries can sue on the policy despite no privity or consideration.

Trident appealed to the High Court.

Held

Mason CJ and Wilson J

Their Honours noted (at 115) that"

‘This court has hitherto accepted that a third party cannot sue upon a contract and that a stranger to the consideration cannot maintain an action at law upon it’.

They noted that the fundamental rules of privity of contract and the requirement that consideration move from the promisee have been ‘under siege’. Noted that in the US third parties (in most states) can sue directly on contracts made for their benefit by others. But, despite calls for reform, the traditional rules have survived in the UK and by extension in Australia. There have been some statutory reforms like the Insurance Contracts Act 1984 (Cth) permitting third parties to insurance contracts made for their benefit to sue directly on the policy in some cases.

Normally, however, the traditional rules apply and their Honours observed that the possibility of an action for damages (normally only nominal) ‘at the suit of the promisee for breach of the promise to benefit the third party is not a sufficient sanction to secure performance of the promise’. Specific performance may be an available and suitable remedy in some cases but not all and the third party remains dependent on the promisee to enforce the promise on their behalf.

On the specific question of whether the ‘old rules’ apply to policies of insurance their Honours considered that the old rules should not apply and McNiece should be entitled to succeed on the contractual claim. They noted that while an action based on estoppel might be possible, the rights of a respondent should not depend upon its ability to make out this claim.

More generally (obiter) they indicated that they would be in favour of a

‘simple departure from the traditional rules [which] would lead to third party enforceability of such a contract [one made for benefit of third party], subject to the preservation of a contracting party’s right to rescind or vary, in the absence of reliance by the third party to his detriment, and to the availability in an action by the third party of defences against a contracting party. …’ (at para 31)

They concluded that McNiece was not a party to the contract and therefore as a general rule the doctrine of privity precluded it from enforcing the contract. However, this was a special case - as McNiece was within the class of persons expressed to be insured by a public liability policy it could enforce the indemnity provided for in the contract.

Brennan J (dissenting)

Justice Brennan held that the privity doctrine precluded McNiece from enforcing the contract.

Deane J

Justice Deane applied the laws relating to trusts to assist McNiece.

Dawson J (dissenting)

Justice Dawson held that the privity doctrine precluded McNiece from enforcing the contract.

Toohey J

His Honour confirmed the existing law on privity but expressed concern that the law was based on ‘shaky foundations’ in ‘in its widest form, lacks support both in logic or in jurisprudence’. However, he concluded that the law was capable of some flexibility. His Honour confined his reasoning to insurance contracts in respect of which he held that where policies of this nature were created for the direct benefit of a third party the third party may sue directly upon the policy, notwithstanding they are not a party to the contract.

(para 21) 'The proposition which I consider this Court should now indorse may be formulated along these lines. When an insurer issues a liability insurance policy, identifying the assured in terms that evidence an intention on the part of both insurer and assured that the policy will indemnify as well those with whom the assured contracts for the purpose of the venture covered by the policy, and it is reasonable to expect that such a contractor may order its affairs by reference to the existence of the policy, the contractor may sue the insurer on the policy, notwithstanding that consideration may not have moved from the contractor to the insurer and notwithstanding that the contractor is not a party to the contract between the insurer and assured.'

Gaudron J

McNiece could not recover in contract as a result of the operation of the privity doctrine. However, it could recover based on a claim of unjust enrichment:

'In my view it should now be recognized that a promisor who has accepted agreed consideration for a promise to benefit a third party is unjustly enriched at the expense of the third party to the extent that the promise is unfulfilled and the non-fulfilment does not attract proportional legal consequences. Although exceptions to and qualifications of the rules of privity and consideration and the doctrines of trust and estoppel operate in certain circumstances to preclude any unjust enrichment, the exceptions, qualifications and doctrines should not be seen as reasons to impede the development of legal principle which will obviate all possibility of unjust enrichment. Rather, their existence should be seen as demonstrating the necessity for the recognition of such an obligation.' (para 10)